Google Surpasses Expectations, But Investments Hurt Profits

Earlier this week, Google’s parent Alphabet (Nasdaq: GOOG) reported its fourth quarter performance. While the company surpassed market expectations for the quarter, rising costs and lower advertising prices are hurting its profits. The market was not happy, and in the after-hours trading session, the stock fell 3%.

Alphabet’s Financials

Alphabet’s fourth quarter revenues grew 22% over the year to $39.28 billion, significantly ahead of the market’s forecast of $38.93 billion. Traffic Acquisition Costs came in at $7.44 billion, compared with the Street’s forecast of $7.62 billion. Alphabet ended the quarter with a net income of $8.95 billion, compared with a net loss of $3 million recorded a year ago. Adjusted EPS came in at $12.77 compared with $10.82 expected by analysts.

By segment, Google’s advertising revenue grew 20% over the year to $32.64 billion, with Google Properties contributing $27 billion in revenues and its Network Members’ properties bringing in the remaining $5.6 billion. Other revenues for Google grew 31% over the year to $6.49 billion, compared with the market’s forecast of $6.43 billion. This segment includes revenues from the Cloud. But Alphabet did not break out the revenues for Cloud services separately. Revenues from Other Bets came in at $154 million compared with the market’s estimates of $187 million. The Other Bets segment continued to report losses and ended the quarter with a net loss of $1.3 billion, compared with a loss of $748 million reported a year ago.

Among operating metrics, paid clicks on Google properties jumped 66% and cost per click fell 29% over the year and 9% over the quarter. The reducing cost per click is causing alarm among investors as it signals a loss in Google’s pricing power. Some believe the erosion is driven by the mounting pressure from the likes of Amazon which is increasing its presence in the digital advertising segment. Within the non-Google properties, impressions on network members’ sites grew 7%, and cost per impression rose 5% over the year.

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